Outbrain Acquires Zemanta

 

In news related to the native advertising space, Outbrain recently acquired Zemanta. Given our relationship with both of these companies, it’s worth considering the move further. 

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As a little background, Outbrain is the number 2 player in the content recommendation space - they invented the field but were eventually overtaken by Taboola in terms of scale. That said, they do maintain a large footprint of tier-1 publishers, and generally have a slightly higher level of content in their recommendations, though it’s hard to tell. They also don’t let programmatic buyers buy with the same level of access as Taboola, which more or less has allowed for unfettered access. We compete to some degree with these companies. Especially in mobile, there is only so much real estate, so all monetization partners compete to some degree. We compete directly on a small number of publishers. And broadly in the native ecosystem, even though our value propositions are very different (they focus primarily on direct-response - and often have units designed to give no pre-click branding at all, while we're much more focused on branding), there is still some confusion around the margins about the differences between our companies. 

Zemanta is a native DSP. They started as a content recommendation tool themselves - but as a plugin to Wordpress where content creators could use their tool to identify interesting links or multimedia that have relevance to the content that they were writing. This technology was sold to Sovrn (which is the remnants of the Lijit / Federated merger, and which is an Adsense competitor that focuses on long-tail sites). Zemanta then pivoted to become a self-service DSP that focuses on the content space, presumably leveraging at least some of the technology it had built.  

Outbrain and Taboola have very similar businesses. Specifically, they pay publishers for the right to include content recommendation on their site - generally in the form of a CPM guarantee with some revshare above a fixed amount. The sponsored content in the content recommendation units is generally direct-response advertising or clicks out to another publication that tries to monetize those users at an amount above whatever it paid for the click. There is also at least some actual content interspersed in the content recommendation block - real articles about similar content based on the user and the page’s content. Publishers that get paid by Outbrain and Taboola “lose” the users that click off on any ad or other content, so they can also elect to pay to get an equal number of users to return. This means that if they lost 1,000 users and were paid $5, then they would try to get 1,000 users back for less than $5, and then be net positive on revenue and equal on users. This creates a highly profitable positive feedback loop for the content recommendation companies. 

The problem is that both companies do exactly the same thing for publishers, and both have elected to use an “exclusive” model - meaning that they must be the only content recommendation company that a publisher uses. As a result, Outbrain and Taboola have to bid ever-increasing amounts to beat the other as the guarantees that they'd pay - up to the point where they lose money on certain publishers. Because both are so prevalent, they have enough user data and enough advertiser traction that they both have sufficiently similar monetization on their networks of publishers. As a result, they have each seen their margins decrease. They may have considered is simply merging - meaning they could immediately stop bidding against themselves (there are other companies in the space, but they are much smaller than Outbrain and Taboola). There have been rumors that this is being discussed, but the CEOs of the two companies seem quite different in terms of personality. Only one CEO would remain in a merged company, so this would require tremendous levels of sensitive negotiations.

Both have also undertaken other responses to this competitive pressure, Taboola acquired Convert Media - an outstream video company. They have started to show videos in their content recommendation blocks at what is likely a higher monetization rate. This lets them bid more for publishers and make a higher margin. It also makes their content recommendation more of a burden for publishers, so the calculus changes slightly. Taboola has also introduced programmatic demand throughout its ecosystem, while Outbrain has largely held off - believing that programmatic demand, relative to its contextual demand, lowers the lifetime value of users on its platform. 

Outbrain has taken a different model to competition - moving to “off-network.” This means that rather than focusing all its effort on maximizing yield to the publishers given the set of advertisers with whom it has relationships, it is trying to maximize the amount of revenue it makes from its advertisers. This, in turn, would increase the company’s aggregate margin and may allow it to pay publishers more without necessarily resorting to lower quality content or heavier advertising models (or to simply be profitable). They have very interesting user data - they generally keep track of each user and the content of every article that they read - so can do interesting modeling for targeting across the rest of the web. Over the past year or so, they have been scaling up this business through Zemanta. Zemanta itself has grown ahead of our overall growth, meaning they are a growing percent of our business. As native grows, Outbrain will be an increasingly large player. They can make a credible case to DR customers on their network, and using their user data and access to more premium demand, to branding customers through their user extension play. It’s a very different model, and one that we haven’t seen many supply-focused companies embrace - but the timing and opportunity make it particularly interesting. 

 
 

Neustar Acquisition

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The big news this week is that Neustar, a large, publicly-traded company was purchased by a private equity firm (Golden Gate Capital) for just under $3B. In today's LiftLetter, we talk about that company, another sleeping giant in the space (we discussed Axciom a few weeks ago, here: Acxiom and Identity).

Quick aside about private equity deals, for those who are interested, is generally that private equity firms identify profitable, underpriced companies, buy them - in large part with debt that is paid for with the company's profits, optimize that company's operations, and eventually sell them. So it was concluded that Neustar's public stock price did not fully capture the long-term potential of the company and that there was meaningful upside if the appropriate optimizations are made.

Neustar was founded as a unit of Lockheed Martin to enable cell phone number portability across the country and eventually spun out as a separate entity. As a result of its mission, it developed one of - if not the single largest databases of phone numbers and related metadata. The company expanded its footprint to help telecoms and similar companies do more insightful analysis with their telephone number and web data databases, such as location data for ISPs and wireless carriers.

The company purchased TARGUSInfo in 2011 for $650M. Targus was an early audience platform on the web and also provided a number of important telecom functionality, such as Caller ID. Targus also provided lead verification as well as audience insights for display advertising and local search. The combined entity moved into marketing areas such as geo-targeting online advertising, website localization and others (e.g. call center optimization).

The company then acquired AggregateKnowledge in 2013 for $119M. AK primarily enabled Neustar to leverage its telephone, location and related information for media buying in a more effective way - moving to include display, email, direct mail, and the like in a single solution for marketers.

In 2015, Neustar acquired Marketshare for $450M. Marketshare is a marketing analytics company that is meant to help the CMO justify various marketing expenses to the CFO. Alternatively, it helps companies understand which of their various marketing activities "drive real results." This meant, basically, that Neustar was filling out a marketing stack to compete with the likes of Adobe, Oracle, etc. Marketshare has not been as successful as originally hoped since the acquisition.

Neustar's original raison d'etre, number portability, was up for renewal in mid-2015 and lost - the contract was awarded to Ericsson. Before this happened, marketing was nearly 1/3 of Neustar's revenue. The company had been developing an audience identity solution named OneID based on the combination of all the data from its various sources. This is the basis of a growing DMP-style business that effectively offers a similar product to Axciom.

As part of the acquisition, Neustar will be split up into two divisions - a marketing services company and a telecom infrastructure company. The former is a high-growth enterprise while the latter is a high-revenue but low-growth company. These generally appeal to different investor sets, so companies with significant components of each are punished by both types of investors for not exactly meeting their criteria. It's likely that Golden Gate Capital will split off the two, invest in growing the marketing services division to capture its upside and eventually IPO (or sell) that division. The telecom division is larger with fixed and predictable margins, so Golden Gate will likely use its profits to pay down much of the debt of the acquisition until an IPO is sufficiently profitable.

Acxiom and Identity

Acxiom, the publicly traded data broker, recently announced two acquisitions - Arbor and Circulate. Neither of these companies were very large, the total outlay for both combined was $140M, yet they show Acxiom's continued momentum building a true identity-based competitor to Facebook, Google, and Verizon.

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In our side of the business, we rarely discuss data players in much depth, so it's worth taking a minute to discuss who Acxiom is. Headquartered in Arkansas, the company is nearly 50 years old. Acxiom started in the days of direct mail, phone calls, and market research. In the past several years, it has moved forcefully into the digital space by merging its huge traditional data business with online identity tools. The company maintains huge records of offline behaviors, including credit card purchases, medical conditions that it can legally access or infer, deeply detailed demographic information along with online records - often linked through credit card numbers, email addresses or other deterministic-ish data sources. Their acquisition of LiveRamp only furthered the push into unifying disparate digital data sources into a holistic understanding of the customer. (Many have concerns about some Acxiom business practices, but this is beyond the scope of this discussion. Feel free to read more here: http://www.nytimes.com/2012/06/17/technology/acxiom-the-quiet-giant-of-consumer-database-marketing.html and https://www.ftc.gov/news-events/press-releases/2014/05/ftc-recommends-congress-require-data-broker-industry-be-more).

LiveRamp is a platform that allows entities to move data between partners. For example, if a company has a CRM with its customer data, it can use LiveRamp to upload that data and sync it to its partners by understanding the user IDs of the various partners (e.g. ad networks, Facebook, etc) and pushing the data to be available in all of those systems. This even means that if you're an offline company, you might be able to use credit card purchases of your customers, sync those with LiveRamp's ability to tie credit card numbers to online identities, and create a targetable pool of users online. So whatever your data is, and whatever identity key you have for that data (e.g. telephone numbers), as long as LiveRamp also has that identity key, that data can be used wherever through the LiveRamp system. This is valuable for marketing to those customers, licensing this data out, or enhancing various other data attributes. And, of course, Acxiom's extensive and valuable data can be matched and distributed through the same mechanism.

LiveRamp recently announced the acquisitions of Arbor and Circulate. Both companies were focused on mobile with similar missions. Both offered publishers recurring revenue based on their logged-in users - without publishers adding additional advertising to their sites. Users often provide some form of ID for email updates or other login purposes. These are then synced offline with Arbor / Circulate, and matched - often focusing on device ID as a main key. In effect, Arbor and Circulate were beginning to recreate LiveRamp's CRM connectivity offering, but designed for a mobile-first world (so adding things like location that hadn't been as important for LiveRamp). They had established a combined ~250 publisher relationships. While their revenue was limited - $5M combined, estimated for 2017 - they presented a growing thread to LiveRamp's CRM matching hegemony.

As Google and Facebook create closed silos of data, LiveRamp has created a very open mechanism to move and understand data. That said, with Google and Facebook, users have some understanding that their data may be tied to marketing data. Most consumers have no idea that Acxiom / LiveRamp exists, nor that when they enter their email into a form they are creating a persistent link for their identity to a device. The opt-out mechanism is hard to understand because the device provider is hard to trace. Thus, while their open platform is generally good for marketers - it is significantly more likely to be regulated than either Facebook or Google's opt-in systems (you do have to agree to their terms of service, regardless of whether you read them).

AT&T - Time Warner Merger

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AT&T and Time Warner (TW) recently signed a merger agreement in which AT&T would acquire TW for roughly $85B. This is a big deal, both in dollar amount and potential media industry impact. Generally, the acquiring company pays in some combination of cash and stock. There may be conditions to actually complete the transaction, such as antitrust approval and financing requirements. In the current deal, AT&T plans to get a ton of debt, bringing its total outstanding debt load after the deal to $200B. That means that the combined company will, among other things, need to pay an awful lot of interest every year - meaning it must be very profitable.

Deals over a threshold around $85M are automatically subject to antitrust review in the US. That threshold is, as an aside, what dictated the maximum amount Google was willing to pay for Invite Media. Often very large deals come with certain stipulations by the US or foreign governments. In addition, broadcasters are highly regulated - especially by the FCC. When Comcast bought NBC, for example, it was required to continue to make NBC programming available overall channels. When Verizon bought AOL, there was less traditional broadcast content, so the deal was less impacted (that said, Verizon's use of wireless data in the AOL ad context is still heavily regulated). 

So what's going on here? First, the growth in the cell phone market appears to be tapering. The number of net new subscribers in the US is quite low. There is also some degree of price competition, meaning there's an effective ceiling on industry profitability. While still a very lucrative business (meaning AT&T can indeed afford a high debt load for a while), the writing's on the wall on the growth side. Cellular is, to some degree, becoming a "dumb" commodity. Services like Google Fi have taken it further and are actually white-labeling Sprint and T-Mobile, meaning the customer may completely lose direct contact with wireless provider in the future. Even the worst providers are good enough.

In the meantime, content is changing. The new guard consists of players like Facebook, Youtube, Amazon Prime and Netflix. Each has some new or planned play on the infrastructure side of things. The old guard (Time Warner, Disney, Paramount, etc) is losing its hegemony. That said, Time Warner has a huge range of great assets, including HBO, Warner Brothers, a large interest in Hulu, etc - but not Time Warner Cable (that was spun out and then acquired by Charter). AT&T has DirecTV, Uverse, AT&T Wireless, etc. This new enterprise is a complete suite of offerings - every channel of distribution, and nearly every sort of content. It lines up most directly with conglomeration under the Comcast umbrella, including cable, NBC, Universal - and, starting next year apparently, a wireless service.

There are currently rules about not being able to favor one's own content as a provider, but this is constantly under assault through lobbyists and targeted legislation. So one theory is that eventually net neutrality may be significantly weakened, allowing these players to increase the value of their own services by offering exclusive content only on channels they own. Another is simply that they'll be able to more effectively monetize by controlling the end-to-end experience - and possibly create a truly viable competitor to the new guard. Comcast's Xfinity has, for example, created an experience that allows you to watch TV seamless across all your devices.

As platforms like Apple and Google get more powerful (Apple was reportedly eying TW as well), it may very well be the case that traditional FCC rules separating distribution and content are decreasingly relevant, because the distribution platform - which is unregulated - may become just as, if not more important than the infrastructure. This would mean that a change in net neutrality and a strengthening of the importance of their distribution channel with high quality, unique content is the only way to remain relevant in the future.

E-commerce Acquisitions

In the last few weeks, we saw a couple interesting acquisitions in the ad tech space signaling a shift towards increasing focus in the retailer space. This included Xaxis purchasing Triad Retail Media and Criteo buying Hook Logic.

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Xaxis is part of WPP. It is not an agency trading desk, but rather a technology platform that, among other things, creates technologies that optimize digital audiences and takes forward positions on media to ensure prime positions - including putting its own header bidding solution on publisher pages, owns creative tools, etc. When an agency buys media from Xaxis, the actual price of the media is generally not transparent - but they are not just getting the media, they are getting the full suite of Xaxis's offerings. Triad is a solution that creates advertising for ecommerce sites. They work with many of the largest ecommerce platforms except Amazon, and work not only to effect remnant monetization, but also to create on-site experiences / microsites. For example, if Iams pays Walmart to promote its products on walmart.com, Walmart may create a special Iams microsite with unique content, which is promoted various across walmart.com, all powered by Triad.

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Criteo's primary product is personalized retargeting - meaning it shows you ads for things that you looked at but haven't purchased, everywhere that you go. Hook Logic provides retail companies with tools to allow brands to buy highly targeted ads for customers on the actual retail site. For example, if you search for DSLR cameras on a camera website, the camera website can work with Hook Logic, which in turn might work with Nikon to create a promoted listing on the top of the search results that would return the ad for the Nikon product. This would allow the ecommerce site to make money on the ad, and make money for the fulfillment of the product - effectively dynamic slotting fees (which we discussed in the past here: Slotting Fees)

Both of these acquisitions speak to the desire of advertising technology companies to close the loop between marketing and sales. Both Xaxis and Criteo have plenty of technology to help retailers expand their footprint through advertising technology. As retail continues to move online, ecommerce companies are increasingly the gatekeepers of commerce - which, of course, is the ultimate goal of advertising. In these transactions, the advertising technology companies are buying closer relationships with the retailers. They bring money and a share of advertising - and get a possibly-exclusive inventory. All this speaks to the ever-growing importance of retailers in an era that will be defined by digital commerce. They are platforms that spend to drive users - and also the platforms that brands must use to actually fulfill orders. Advertising technology solutions that empower these retail platforms will - the bet is - have powerful positions as digital commerce evolves. Looking at China, Alibaba - one of the largest companies in the world - draws a substantial percent of its revenue through advertising on ecommerce. It is likely that we will see this become a larger and larger segment through the rest of the Western markets.

Salesforce Ad Tech M&A

Salesforce is a large, sweeping organization that aggressively uses M&A as a tactic to ensure it continues to head in the right direction. They have invested materially in marketing and advertising technology, slowly building a stack that has put it in contention with the marketing technology leaders like Adobe and Oracle.

Some noteworthy acquisitions include:

  • ExactTarget - an email marketing platform for $2.5B
  • BuddyMedia - a social marketing platform for around $750M
  • DemandBase - an account-based marketing tool for $2.8B
  • Krux - a DMP for $700M
  • Radian6 - a social analytics tool for $325M

Those acquisitions alone are around $7B in investment to build a marketing cloud.

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Salesforce's main revenue and growth engine is its CRM stack. This provides a way for sellers to organize, track and optimize their workflows and to align them more directly with company targets. Some acquisitions - like ExactTarget and DemandBase - are logical extensions of the CRM tool. These allow companies to market directly to prospects with optimized messaging, context and frequency.

But Salesforce may have a more subtle play. They have invested heavily in AI, recently releasing their new "Einstein" product, which aims to create a pervasive layer of artificial intelligence throughout their various products. When combined with tools like ExactTarget and DemandBase - AI is a natural fit to optimize and improve the output of sales teams while creating deeper hooks into the Salesforce platform. Krux is an additional arrow in the Salesforce marketing quiver. Krux's extensive relationship with hundreds of top publishers gives Salesforce access to huge amounts of data that - in addition to tools like Radian6 - it can use to add additional signal to marketing optimization efforts (there are other syngeries to the Krux deal, but that's besides the point).

This may explain why Salesforce has frequently been mentioned as a potential suitor for Twitter. Comparing their direct lines of business - CRM and public messaging - there is no obvious benefit to either. Yet with Twitter, Salesforce gets a stream of data that it could theoretically use to power sales intelligence - as well as log-in data that could tie account-based targets across various devices (perhaps linking ExactTarget and DemandBase more directly).

In the context of Salesforce's marketing cloud, there are a few additional pieces, including possibly creative tools, a DSP, a commerce analytics company, and an advertiser-side data piece that could create a particularly formidable marketing company. They have many focuses as a company, and have recently come under fire for possibly being too aggressive with their acquisitions. So it remains to be seen what they do in the foreseeable future, but it's evident that Salesforce is consolidating data and customer connection tools and will continue to grow in the space.